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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   May 2005

Hard-Equity Brokerage Produces Simple Lender Solutions

What do you do when you run out of lenders and your borrower’s mortgage is still not funded and closed? A hard-equity loan may be the answer for your borrower’s need. All mortgage brokers should offer their borrowers a hard-equity-loan alternative when they do not qualify with a traditional lender. This must be a written procedure in your processing cycle.

Implementing a hard-equity-alternative program is a direct, tangible financial and professional benefit to you as a mortgage broker. Financially, your closings add brokerage commission and fee income. Professionally, you’ll know you have helped solve a borrower’s financial needs.

There are many options for conforming mortgage brokers entering the hard-equity mortgage-brokering market. Options also exist for brokers who are in the market but want to expand their business. There is no reason to leave money on the table. Starting this hard-equity program can boost commission and fee income by 20 percent.

What is a hard-equity loan?

Hard-equity loans have no plain, concise definition. People define these loans differently. Mortgage lenders, mortgage brokers, borrowers and federal and state regulatory agencies have their own interpretations.

Generally, the most important thing to consider when creating a hard-equity loan is the value of the real property without regarding the mortgagor or mortgagor’s income, credit or other assets. A hard-equity-mortgage lender determines the property value by personal experience or real-estate appraisals.

The loan-to-value and terms can temper other factors. The loan-to-value affects interest yields. Hard-equity investors also can place a personal spin on factors. Other factors include combined loan-to-value and property types as well as the mortgagor’s income, job, credit, assets and status of foreclosure or bankruptcy. The condition of the subject and condition and type of neighboring property also come into play.

The Home Ownership Equity Protection Act of 1994 (HOEPA) also has changed the definition. A loan regulated by the act is known as a HOEPA loan, a Section 32 loan, a Section 129 loan or a High Cost loan.

A HOEPA loan is a loan on a borrower’s principal residence closed after Oct. 1, 1995. On this type of loan, the fees exceed federally set amounts or the annual percentage rate exceeds an interest rate calculated monthly, based on comparable U.S. Treasury securities. Statutory disclosures, requirements and limitations exist, and many hard-equity mortgage lenders do not make HOEPA loans. Thus, even less credit is available for certain borrowers.

Hard-equity lenders overlook many items that are critical to traditional lenders. These details include foreclosures, bankruptcies, judgments, credit dings, damages, unreported income, high debt ratios, unknown down-payment sources and the total of outstanding mortgages. In return, the loan-to-value will be lower and the interest rate, brokerage points and fees will be higher than what traditional loans offer.

As professionals, mortgage brokers should shop for the best rates and terms for their borrowers. In many cases, though, the only alternatives are hard-equity loans or no loans. A hard-equity lender provides necessary services for a borrower who does not qualify for loans from typical lenders.

Who wants a hard-equity loan?

No one wants a hard-equity loan. It is a stopgap to give homeowners time to correct their situations. Clients need them in times of a:

  • Foreclosure
  • Bankruptcy
  • Divorce
  • Borrower’s death
  • Credit problem 
  • Job loss
  • Business failure
  • Unreported income
  • Tax lien

These are the predominate instances in which a hard-equity loan will solve a client’s financial situation. Keep in mind that the three primary reasons for foreclosures and credit problems are divorce, death of a borrower and job loss. All are fertile areas for marketing to generate hard-equity loans.

What attributes should a lender possess?

Your hard-equity lender must be:

  • Fast
  • Flexible
  • Able to fund directly

First, a hard-equity lender must be fast. Hard-equity borrowers want their loans closed yesterday. Their lenders must be experienced in working hard-equity loans fulltime and hold a professional-money-lender license. They should not be part-time lenders who merely have some extra money to invest.

Professional hard-equity lenders have the time and experience to see a borrower’s real property quickly, approve the loan quickly and make skilled decisions about the rate and terms — quickly. They also have a closing agent and an appraiser who understand the business and work on the same, fast-paced timetable. In many cases, hard-equity lenders examine the interiors and exteriors of all of their properties. A termite inspection, roof inspection or survey might be required if lenders spot a potential problem.

Second, a hard-equity-mortgage lender must be flexible. Unlike a Federal National Mortgage Association loan that has to fit exactly into the box, each hard-equity loan must be handled and analyzed individually. A typical traditional-mortgage lender’s investment matrix or grid will not work. Each lender must adapt to each transaction.

Unlike traditional lenders, hardequity lenders also can make “gut-feeling” decisions. They are private individuals, not large corporations. Sometimes personalities do enter the equation, which can be beneficial. For example, a lender once exceeded the standard loan-to-value for a young couple who he thought deserved a chance to rebuild their lives.

Third, hard-equity lenders must be direct lenders who lend their own money. Direct lenders make their own decisions on the spot without having to consult a boss, bank, board, committee or out-of-town underwriter. They also have immediate access to funds necessary for closing quickly. In this case, it’s inefficient for lenders to act as mortgage brokers who must consult with actual lenders.

The nature of hard-equity loans is distinctive and peculiar. It’s important to build a relationship with a lender who concentrates in this area.

What are the terms to expect?

Most hard-equity lenders offer as much as a 65-percent loan-to-value on an owner-occupied, single-family residence. Lenders can reduce the loan-to-value for other real properties. These can include nonowneroccupied real properties, vacant residential real properties, condominiums, townhomes, mobile homes, mobile homes with land, vacant land and commercial real properties.

Usually, loan-to-values of as much as 50 percent are available on commercial real properties. For vacant land, the maximum loan-to-value varies from 30 percent to 50 percent. Hard-equity land lenders, however, are rare.

Interest rates and mortgage lengths can vary. The rate high can be the maximum interest rate allowed by the state where real property is located. The low can be several points more than the nonconforming rates. They can last from six months to 30 years. Most lenders’ amortization periods range from interest-only to fully amortized loans. Smaller loans often are self-amortizing. A hard-equity loan on investment property generally is interest-only with a one-year balloon. Most hard-equity lenders charge several lender points, lender-inspection and document-preparation fees and a prepayment penalty.

What benefits do these loans bring to the mix?

Your competition might be brokering hard-equity loans. Borrowers whom you cannot reach with conventional loans can shift to them.

Do not leave money on the table. You will miss more than half of the mortgage market — more than 50 percent of all borrowers do not qualify for conventional financing.

After finding clients, the work comes down to processing loans. It’s a simple process, requiring:

  • Loan-application form No. 1003
  • Good Faith Estimate 
  • Proper disclosures such as the HOEPA and Real Estate Settlement Procedures Act documents.
  • Credit report
  • Real-estate appraisal
  • Payoffs
  • Title insurance

A hard-equity mortgage lender can process your mortgage loan and will prepare the HOEPA loan disclosures.

Hard-equity-brokerage fees are significantly higher than the oneto two-point average charged on conventional loans. In Florida, for example, hard-equity-brokerage points range from two to 10 points, with an average of five to seven points.

The short time from applying to closing also is an advantage to hard-equity loans. Income and credit usually are not considered, so closing takes a few days, compared to weeks for a conventional loan.

How are hard-equity loans started?

Seek professional, direct hard-equity mortgage lenders. Talk with them and determine their general underwriting criteria, terms, conditions and rates.

Create procedures today so every rejected loan becomes a potential hard-equity loan. This includes loans that your employees and lenders turn down immediately and those that go bust at the closing table.

Let your mortgage colleagues know that you are now closing hard-equity loans. They could introduce you to a hard-equity lender in your area.

Begin or continue advertising in the phone book, in newspapers, in other publications, on radio, on television or via direct mail. Indicate that you do hard-equity lending. Each community addresses this differently, so study regional ads to see how hard-equity loans are sold. For example, the ad could read: “Hard-equity loans — bad credit = OK, bankruptcies = OK, no credit = OK and no credit turndowns.”

Whatever the method, hard-equity lending will increase your income. You must not leave money on the table, and you always must try to meet all borrowers’ needs.


 


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